Meeting the challenges of Belt and Road

Reporting from Hong Kong Arbitration Week, CDR finds that while China’s Belt and Road Initiative should create dispute resolution opportunities, it is clear that Chinese parties will demand greater use of mediation.

Competition among arbitral centres and jurisdictions to be the home of Belt and Road Initiative (BRI) disputes is intensifying, but exactly what form those future disputes will take remains unclear, as arbitration, mediation and litigation all jostle for a role.

The feeling among speakers and delegates at the opening of Hong Kong Arbitration week on Monday, was that while last year’s event stressed the great opportunities presented by BRI, there are many potential risks associated with the initiative and a great deal of uncertainty over what it will mean for the dispute resolution market, with the details still to emerge.

Speaking at an event hosted by Skadden, Arps, Slate, Meagher & Flom, Rory McAlpine, a partner with the firm, explained how the BRI is designed as a successor to the ‘go global’ policy of the 1990s, to allow Chinese companies to compete internationally.

Covering 70 countries, accounting for one-third of the world’s GDP and 65% of its population, BRI is a significant undertaking, which was enshrined into the Chinese constitution in October last year and will expand over time into fields including logistics and technology, as well as a ‘digital silk road’ for online services. However, BRI also remains poorly defined, with little clear indication of what is and is not a BRI project.

Despite this, around USD 1 trillion has been committed by China so far, which could rise as high as USD 10 trillion in the future, although the vague nature of the programme makes it hard to quantify precisely. The money comes from state-owned banks, policy banks, multilateral development banks and the USD 40 billion Silk Road Fund.

The major risks for BRI are that it involves many countries which are prone to political, security and corporate governance instability. Add to this that many of the participants, such as state-owned enterprises (SOEs), often have issues with accountability, as well as construction and infrastructure projects being typically contentious anyway, and the risks become deep-rooted.

There are also a wide range of financial and economic risk factors, including fraud, said Kim Rooney, a barrister and member of ICC International Court of Arbitration (ICC) in Hong Kong.

Some BRI-related projects have already run into trouble, such as the Sino-Thai high-speed railway, which was delayed and now exists in a significantly changed form, and the troubled Hanbantota Port project in Sri Lanka, which fell into financial difficulty and ultimately into Chinese hands, although that outcome does fulfil Chinese strategic objectives.

ARBITRATION EVOLUTION

BRI also means a clash of legal systems for the many different countries along the route, with former Hong Kong secretary of justiceRimsky Yuen SC, now a barrister with Temple Chambers, saying that the Chinese Department of Commerce is one of a number of bodies considering whether there should be a standard form, or series of standard form, contracts for BRI projects, to bridge that gap.

“You have to have a sustainable business environment” if people are to invest in BRI and good dispute resolution methods are essential to this, Yuen added. But as befits an initiative that is hard to define, there is no over-arching arbitration agreement or clause for BRI disputes. Nonetheless, arbitration remains an obvious choice, as it is popular with many Chinese SOEs and with many BRI countries having unreliable court systems.

The popularity of arbitration in China was highlighted by July’s launch of theHainan Court of International Arbitration, which also indicated a growing desire to engage with the international arbitral community.

The Hong Kong International Arbitration Centre (HKIAC) is using arbitration week to promote its credentials as a home for BRI arbitration, with secretary-general Sarah Grimmer pointing out that Chinese parties are now the number two nationality in HKIAC disputes and reporting that although it is hard to measure exactly, the institution has seen an impact already from BRI.

In 2016-17, the number of cases which were either English-Chinese bilingual or Chinese language only, has gone past 10% for the first time, while there has been a significant increase in the number of mainland Chinese claimants at HKIAC. This has driven a change in the nature of cases handled by HKIAC, which traditionally had a strong base of construction and infrastructure-related cases, but is seeing more financing and corporate cases, many of them with mainland Chinese parties.

HKIAC’s recent establishment of a financial disputes panel is intended to reach further into this market, while the centre has also established its own committee of specialists to attract BRI work, and established an outreach programme into countries including Indonesia and Malaysia.

ICC president Alexis Mourre is also in Hong Kong, promoting his institution’s international experience and highlighting its track record arbitrating disputes involving state entities, as well as the establishment of its BRI commission. He was, however, cautious about the early impact the scheme has had on arbitration numbers, saying that it is “a bit early to say BRI has resulted in an increase of our caseload”.

MEDIATION’S RISING POPULARITY

However, Monday’s consensus was that mediation will play a prominent role in the future of BRI disputes and that the arbitration community will need to respond to Chinese demand for mediation and mixed-mode arbitration, such as arb-med-arb.

Yuen observed that mediation might be well-suited to resolving the clash between legal systems and cultures, because it can be less formal and legalistic, and with UNCITRAL due to sign its convention on the enforcement of mediation settlements in Singapore next year, it will become even more appealing.

This has required some adjustment by Hong Kong, which has traditionally not been so keen on mediation despite it being embedded into its civil litigation procedure, but Dennis Kwok of Hong Kong’s Legislative Council, noted that it is already being taken more seriously, with judges being hired as mediators.

Speaking at a separate ICC event hosted by Freshfields Bruckhaus Deringer, Justin D’Agostino, chair of the ICC’s BRI commission and managing partner for Asia at Herbert Smith Freehills (HSF), said that Chinese SOEs “want to change the conversation around arbitration” by incorporating more mixed-mode disputes and more mediation. They are no longer willing to accept traditional arbitration and it is up to arbitration practitioners to adapt.

That trend was also noted by Ellen Zhang of HSF, who said Chinese privately owned businesses have become very proactive at being the claimant. There is greater caution around investor-state disputes (ISDS), said Olga Boltenko of Fangda Partners, because although they are willing to use it, there are many wider business and geopolitical factors at play, such as China’s diplomatic relations with that country and the impact a dispute may have on other deals.

China, Hong Kong, Singapore and Malaysia have all agreed to promote BRI mediation and the Singapore International Mediation Centre (SIMC) and the China Chamber of International Commerce Mediation Centre (CCOIC) recently signed a memorandum of understanding to that effect.

Litigation cannot be entirely ruled out, however, and in July The Supreme People’s Court of China launched two new branches of the International Commercial Court of China (CCIC) in Shenzhen and Xi’an, which will handle BRI cases

HONG KONG’S POSITION

There will also be competition among legal system to attract BRI parties. The Asian Infrastructure Investment Bank (AIIB) is reportedly inserting the UNCITRAL model into its clauses, while other lenders may impose their own conditions.

Hong Kong law is well-positioned to play a role, given its established status as a bridge between China and the West, if it can disperse fears that it is too close to the PRC. Here, Yuen was keen to use the platform to bullishly reject any aspersions cast on Hong Kong’s neutrality when it comes to Chinese parties, saying “I do not see any force in the argument that Hong Kong is part of China and not neutral”, and pointing to the presence of foreign judges at the Court of Final Appeal as a sign of its neutrality.

He was joined by Kwok, who stressed the quality and independence of the judiciary and “the importance of transparency and efficiency”, while Yuen said Hong Kong “is very eager” to play a role in BRI conflicts.

Among other recent dispute resolution developments in Hong Kong is the adoption of third-party funding for arbitration, although it has yet to actually come into force and Kwok used the Skadden event to call on current Secretary for JusticeTeresa Cheng SC to announce when this will happen.

As a next step, he also called for a serious look at either conditional or contingency fee arrangements, so the SAR can compete with other jurisdictions.

Enjoyed this article?

Subscribe to CDR

You get access to hundreds of articles like this one simply by subscribing to the CDR website.

Related Articles

Led by Quinn Emanuel Urquhart & Sullivan, New Stream Trading has filed for arbitration in the London Court of International Arbitration against Antipinsky Oil Refinery and the Swiss and Russian arms of Sberbank, in a claim estimated at “several hundreds of millions of dollars”.

Departing FTI Consulting after more than a decade is Phil Smith, who has been recruited to Ashurst’s e-discovery team in Melbourne, Australia, while the firm has boosted its white-collar crime expertise in London.

The content of this website is for general information purposes only and does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained herein. This material is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.
Please see our terms and conditions page for further details.